3
Money Management
CHAPTER
Strategy
$ What You’ll Learn
W
hen you have completed this
chapter, you will be able to:
Section 3.1
• Discuss the relationship
between opportunity costs and
money management.
• Explain the benefits of
keeping financial records and
documents.
• Describe a system to maintain
personal financial documents.
Section 3.2
• Describe a personal balance
sheet and cash flow statement.
• Develop a personal balance
sheet and cash flow statement.
Section 3.3
• Identify the steps of creating a
personal budget.
• Discuss the advantage of
increasing your savings.
Reading Strategies
To get the most out of your reading:
Predict what you will learn in this chapter.
Relate what you read to your own life.
Question what you are reading to be sure
you understand.
to what you have read.
React
58
In the Real World . . .
S
usan Finn and Farrah Shah are good friends and high
school classmates. They both work similar hours at a bank after
school. However, their financial situations and outlooks are very different.
Susan puts a certain amount of her paycheck in savings; she saves the rest in certificates of deposit, which pay higher interest. She does not buy many new clothes
but hopes to buy a used car. In contrast, Farrah spends her money on concerts or
sporting events every weekend and eats out frequently. She realizes that she is
not building up savings but figures she might as well have fun now.
Most people’s money management habits fall between those of
Susan and Farrah.
As You Read Consider whether you would handle
your money like Susan or Farrah.
ASK
Money When You
Need It
Q:
Do I need an emergency fund even though I
work part time, live at home, and have no bills?
A:
There is no guarantee that your job will always be there for you. If you become
sick or injured, you may have to take time off from work. Even if you have disability
insurance, it may pay only a fraction of what you earn. If you own a car, you may
have unexpected repair bills. Emergency funds are for those unexpected things.
Ask Yourself
How much of your monthly income do you think you should
put into your emergency fund?
Go to finance07.glencoe.com to complete the Standard & Poor’s Financial
Focus activity.
finance07.glencoe.com
Chapter 3
Money Management Strategy
59
Section 3.1
#.#
Focus on
Reading
Organizing Financial
Records
Read to Learn
Opportunity Costs and
Money Management
• How to discuss the relationship between opportunity costs and money
management.
• How to explain the benefits of keeping financial
records and documents.
• How to describe a system to maintain personal
financial documents.
Main Idea
Organizing your personal
financial records can help
you make informed decisions about your spending.
Key Terms
• money management
• safe-deposit box
Before
You Read
PREDICT
Do you think it is necessary
to keep organized copies of
your financial records? Why
or why not?
60
Unit 1
How do opportunity costs affect managing
your money?
Every time you make a decision, you choose one thing and reject
another. This is true no matter how major or minor the decision may
be. Perhaps you decide to go to the movies instead of reading a book
for your English homework assignment. On a Saturday afternoon,
you may choose to play with the neighbor’s dog instead of watching
television or playing with your Xbox. Every decision you make represents a trade-off, or opportunity cost.
Trade-offs are especially common when it comes to making decisions about money management. Money management is planning
how to get the most from your money. Good money management
can help you keep track of where your money goes so that you can
make it go farther. In order to manage your money well, you probably consider financial trade-offs. For example, you may consider
whether you should spend your paycheck on clothes or put some of
it in the bank to earn interest. You might also wonder if you should
shop around for a CD or MP3 player at a lower price or if doing that
is a waste of time.
Trade-offs can be very hard to resolve because you might think
of good reasons for making either choice. In the first example, the
first option would increase the amount you can spend now. However,
depositing some money would contribute to your long-term financial security. In the second example, you might be able to save some
money by checking prices at other stores downtown or at a different mall, but you would also be using up something you can never
replace—your time.
How can you be sure of making the right decisions when you
are faced with tough opportunity costs? You may never be sure, but
you can become a better judge of your options. Consider the factors that influence your decision making by compiling a mental list
of your options. Then consider how those options fit your values,
your current financial situation, and your goal of effective money
management.
Planning Personal Finances
By considering your values, your goals, and the state of your
bank account, you can make better spending decisions. For example,
if your goal is to save as much money as you can for college, then you
might borrow a book from a library rather than buy it from a bookstore. On the other hand, if your goal is to put aside only a certain
amount of your paycheck each month, you might be able to buy the
book with the money you have left.
Benefits of Organizing Your
Financial Documents
As You
Read
RELATE
Have you ever wondered
what happened to a sum
of money you had? Explain
the circumstances.
Why is it important to have a system to organize
your financial documents?
The first step in effective money management is to organize your
personal financial documents. The category of “personal financial
documents” includes a variety of materials, such as bank statements
and paycheck stubs. (The receipt for the shirt you bought is also a
document.) These documents tell you how much money you have.
Personal financial documents also include records that are not
directly related to your day-to-day use of money. Automobile ownership titles, birth certificates, and tax forms are personal financial documents. Together, these records present a clear picture of your finances.
Creating an organized system for handling your personal financial documents has several advantages. Most obviously, a system helps
you quickly find any document you may need in a hurry. Organizing
your documents also helps you:
• Plan and measure your financial progress.
• Handle routine money matters, such as paying bills on time.
• Determine how much money you will have
now and in the future.
• Make effective decisions about how to
save money.
HALF OFF Some people
like to wait until an item they
want goes on sale before they
buy it. When might this be a
wise money management strategy? When might it make more
sense to go ahead and buy the
item, even if it is not on sale?
Where to Keep Your
Financial Documents
Why should you keep your financial
documents in a specific place?
You can keep your financial documents in
different places—in a home file, in a safe-deposit
box, or on a computer. See Figure 3.1 on page 62
for a list of the types of financial documents you
might keep in these places. To organize your documents as effectively as possible, you may want
to use all three. Each method has advantages and
disadvantages, depending on the types of documents being kept.
Chapter 3
Money Management Strategy
61
&IGURE
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STOREINAHOMEFILE
62
Unit 1
Planning Personal Finances
Home Files
A home file is one place to keep financial documents. This type
of file is simple to set up and does not take up much space. You can
use a file drawer, several folders, or even a cardboard box. Whatever
method you use, your home file should be simple so that you have
quick access to your documents.
You may already have the beginnings of a home filing system.
For example, you may have been keeping a savings account passbook in the back of a bureau drawer since you were ten years old,
or maybe you have an accordion file folder where you store all your
receipts. To make good use of a home filing system, sort through all
your personal financial records and arrange them according to the
type of each document. Next, label all folders or boxes. Train yourself to file your receipts and other financial papers as soon as possible
after receiving them.
What types of financial documents should you keep in a home
file? If you have a checking account, keep your bank statements so
that you can determine how much money you have in your account
or verify your checkbook against the statements. However, do not
keep hard-to-replace documents, such as a car title or paperwork
related to a mortgage loan, in a home file. A cardboard box does not
protect against fire, water, or theft.
As You
Read
QUESTION
Why might it be necessary
to have easy access to auto
repair records, bank statements, and receipts for
purchases such as clothes
or video games?
Safe-Deposit Boxes
You should keep important documents such as car titles and
mortgage loan papers locked away in a safe-deposit box—a small,
secure storage compartment that you can rent in a bank, usually for
$100 a year or less. Other items commonly kept in safe-deposit boxes
include rental agreements, birth certificates, adoption papers, a list of
insurance policies, stock certificates, and valuable collectibles, such
as coins or stamps.
Safe-deposit boxes are usually kept in a locked, fireproof room
that is accessible only while the bank is open for business. Each box
has two individual locks. You, the holder of the box, have one key;
the bank keeps the other key. The box can be opened only when both
keys are used together.
Safe-deposit boxes offer more security for your valuables than
your home file because at a bank loss from fire and other disasters is
extremely rare. Moreover, the financial institution that owns the box
usually (though not always) has insurance to cover such losses. Nevertheless, it is probably a wise idea to keep copies at home of all the
financial records in your safe-deposit box.
As an alternative, some people use home fire-safe boxes that
lock. These “safes” are an inexpensive way to protect against loss due
to fire but not due to theft.
finance07.glencoe.com
Chapter 3
TechByte
Net Worth Calculator
Your net worth is the difference between your
assets (the things you
own that have value) and
your liabilities (short-term
and long-term debts you
are working to pay off).
Figuring out your net
worth from time to time
will help you evaluate the
progress you are making toward your financial
goals.
Calculate your
net worth through
finance07.glencoe.com.
Money Management Strategy
63
Home Computers
Rental agreements and canceled checks cannot be stored on a
home computer. However, if you have a personal computer, it can be
a great place to keep certain types of financial records. It is also a good
tool to use for planning your financial future.
You can use a software program specifically designed to keep a
running summary of checks you have written. You enter any checks,
and the program automatically calculates the new balance in your
account. Some programs also facilitate payments online. By tracking
your monthly spending on a computer, you can see at a glance how
much money you are spending, and you can easily compare your
expenses from one month to the next. You can also generate personal
financial documents and statements from the information you have
organized by using software.
Section 3.1 Assessment
QUICK CHECK
1. How will organizing your financial documents help you manage your money?
2. What steps would you take to create a
home filing system?
3. What are the advantages of using a safedeposit box to store your personal financial
documents?
THINK CRITICALLY
4. List three examples of money-related
opportunity costs you have faced in the
last two months. Write a sentence explaining what decision you made for each one
and why.
USE COMMUNICATION SKILLS
5. Organizing Financial Records To become a member of an Internet DVD library,
Maritza has to put down a deposit of $100,
using her credit card. When and if Maritza
chooses to discontinue her membership,
the library will refund her deposit only if
she has returned all her rented DVDs, has
paid the annual membership fee, and has
presented her membership agreement.
64
Unit 1
Planning Personal Finances
Write About It Write a list of some
places Maritza might store the agreement to ensure her claim to the deposit.
SOLVE MONEY PROBLEMS
6. Financial Documents Martin is sitting in his bedroom surrounded by dozens of papers—gas receipts for his car, a
checkbook, a couple of unopened and
unpaid bills, paycheck stubs from his work
at a day-care center, and much more. He
wants to organize his financial documents
in a shoebox, but he is completely overwhelmed by the amount of paper.
Analyze Help Martin prioritize this
job. Give him some suggestions about
breaking it down into parts, starting with
the most important tasks. For example, tell
Martin to begin by categorizing his documents by the type of each document.
Section 3.2
Personal Financial
Statements
Focus on
Reading
Read to Learn
Personal Balance Sheet
How can a personal balance sheet help you
find out your current worth?
Most of the documents mentioned in the previous section are
issued by banks, federal and state governments, and businesses.
However, such documents reveal only part of your financial picture.
For a complete look at your financial situation, you should create
a personal balance sheet and a cash flow statement. These reports
are known as personal financial statements. A personal financial
statement is a document that provides information about an individual’s current financial position and presents a summary of income
and spending.
Personal financial statements can help you:
•
•
•
•
Determine what you own and what you owe.
Measure your progress toward your financial goals.
Track your financial activities.
Organize information that you can use when you file your tax
return or apply for credit.
To evaluate your financial situation, you first need to create a
balance sheet. A personal balance sheet, also called a net worth
statement, is a financial statement that lists items of value owned,
debts owed, and a person’s net worth. Your net worth is the difference between the amount that you own and the debts that you owe.
Net worth is a measure of your current financial position. To create
a personal balance sheet, follow these steps. Figure 3.2 on page 66
shows an example of a personal balance sheet.
STEP 1: Determine Your Assets
Assets are any items of value that an individual or company
owns, including cash, property, personal possessions, and investments. To determine your assets, you need to consider four categories
of wealth. Wealth is an abundance of valuable material possessions
or resources. The categories include: liquid assets, real estate, personal
possessions, and investment assets.
Chapter 3
• How to describe a
personal balance sheet
and cash flow statement.
• How to develop a
personal balance sheet
and cash flow statement.
Main Idea
A personal balance sheet
and cash flow statement
can help you to analyze
your financial situation.
Key Terms
• personal financial
statement
• personal balance sheet
• net worth
• assets
• wealth
• liquid assets
• real estate
• market value
• liabilities
• insolvency
• cash flow
• income
• take-home pay
• discretionary income
• surplus
• deficit
Before
You Read
PREDICT
What information do you
think might be on a cash
flow statement?
Money Management Strategy
65
!0ERSONAL"ALANCE3HEET
&IGURE
Melinda and Carroll Durbin
Personal Balance Sheet as of October 31, 20-!SSETS
,IQUID!SSETS
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%XPLAINYOURANSWER
66
Unit 1
Planning Personal Finances
Liquid Assets The first category is called liquid assets. Liquid assets
are cash and items that can be quickly converted to cash. The money
in your savings and checking accounts is a liquid asset. For example,
if Bharat has $500 in his savings account and $35 in cash, his liquid
assets are worth $535 ($500 + $35 = $535). This money is immediately
available for Bharat to spend. He may be able to convert other assets
into cash, but the process is not quite as easy or as fast.
Real Estate The second category of wealth is real estate, land and
any structures that are on it, such as a house or any other building
that a person or family owns. The amount recorded on the real estate
portion of your balance sheet is the property’s market value, or the
price at which property would sell. Suppose that the Louis family owns
a house and a cottage with market values at $135,000 and $84,000,
respectively. They would list the sum of those figures—$219,000—
under the heading “Real Estate” on their balance sheet.
PLAY TIME Many people
save favorite toys or other
items from childhood. Which
items do you have that might be
valuable? How can you find out?
Personal Possessions Personal
possessions—cars and any other
valuable belongings that are not
real estate—make up the third
category. For example, Joyce might
choose to list her new $800 electric guitar, her television, her skis,
and several pieces of fine jewelry.
Note that the emphasis is on “valuable”; old clothes and used CDs do
not count.
You may list personal possessions on the balance sheet at their
original cost, but you will get a better idea of your financial situation
by recording their current market
value. For example, Joyce’s television is worth less now than it was
when she purchased it five years
ago. In contrast, collectible items,
such as old baseball cards and comic
books, may increase in value over
time. Although determining current
values for some items may be difficult, doing so will give you a more
accurate picture of your net worth.
You may have to look up comparable
items in newspaper classified ads or
visit thrift stores. You can also check
Web sites where people buy and sell
such items.
Chapter 3
Money Management Strategy
67
GO FIGURE
FINANCIAL MATH
NET WORTH
Janine’s net worth is $2,300.
Synopsis: Calculating your net worth will help you
get an accurate measure of your current
financial situation.
YOU FIGURE
Example: What is Janine’s net worth if her assets
are worth $3,000 and her liabilities total $700?
Formula: Assets ⫺ Liabilities ⫽ Net Worth
Solution: $3,000 ⫺ $700 ⫽ $2,300
You own a bike that is worth $250, a watch
that is worth $60, and a stereo that is worth
$400. You owe your older brother $70 for
some concert tickets he bought for you
you,and
and
you have
monthly
school
fees
that
amount
owe $120 to a department store. Whatto
is
$120.
What
is your net worth?
your net
worth?
Investment Assets The fourth category of wealth is investment
assets. Investment assets include retirement accounts and securities
such as stocks and bonds. Set aside such assets for long-term financial
needs, such as paying for college, buying a house, or retirement.
STEP 2: Determine Your Liabilities
When you prepare a personal balance sheet, you must also record
your liabilities, or the debts that you owe. Suppose that Marlene
borrows $200 from her mother to buy a new printer for her computer.
She would record the printer as an asset, but she would also have to
record $200 as a liability on her personal balance sheet.
Current Liabilities Current liabilities are short-term debts that
have to be paid within one year. Most medical bills, cash loans, and
taxes fall under this heading.
Long-Term Liabilities Long-term liabilities are debts that do not
have to be fully repaid for at least a year. Car loans, student loans, and
mortgage loans are examples of long-term liabilities. Note that the term
“liabilities” includes only money that you will owe for longer than a
month. For example, a telephone bill does not qualify as a liability.
STEP 3: Calculate Your Net Worth
As You
Read
RELATE
Using the formula in the
Go Figure box, calculate
your net worth.
68
Unit 1
Once you know the amounts of your assets and liabilities, you
can calculate your net worth. To determine your net worth, subtract
your liabilities from your assets; the difference is your net worth.
It is important to understand the meaning of net worth. If the
Romano family has a net worth of $62,300, that does not mean they
have $62,300 to spend. Much of their wealth may be in stocks, real
estate, and personal possessions, which cannot be easily converted
to cash. Net worth is only an indication of your general financial
situation.
Planning Personal Finances
Although you may have a high net worth, you can still have
trouble paying your bills. This is especially true when most of your
assets are not liquid and you do not have enough cash to meet
your expenses. That can happen if you purchase a more expensive car than you can afford or spend all of your savings to buy a
house.
If you are unable to pay all your debts, you may experience
insolvency. Insolvency is a financial state that occurs if liabilities
are greater than assets. Suppose that Brad owes $4,000 and that his
assets–—a ten-year-old car and an old computer–—are worth $1,800.
Even if Brad sold all his assets and put his whole $1,500 paycheck
toward paying his debts, he would still be insolvent.
STEP 4: Evaluate Your Financial Situation
You can use a balance sheet to track your financial progress.
Update your balance sheet, or make a new one, every few months to
chart changes over time. Is your net worth increasing? Good! Keep
doing what you are doing to make that happen. Is it decreasing or
just holding steady? Then you might make changes. As a rule, you
can increase your net worth by increasing your savings, increasing
your investments, reducing your expenses, and/or reducing your
debts.
Careers in Finance
CREDIT ANALYST
FINANCIAL
ADVISOR Elaine Hawkins
AXA Financial, Inc.
Elaine has always been good at coming up with solutions to difficult or complicated problems, so
handling finances comes naturally to her. In her capacity as a financial advisor, Elaine visits with a
wide variety of clients and helps them understand their financial needs. She also helps them create a
plan for reaching their goals through financial planning, investment services, and risk management.
At a time when people are unsure of the soundness of Social Security and may be financially unprepared for retirement, Elaine is able to provide them with options and comfort. Elaine gains work
through word of mouth and enjoys building and assisting a network of friends and acquaintances.
SKILLS:
Finance, math, communication, business, and problem-solving skills
PERSONAL TRAITS: Entrepreneurial, social, tactful, and goal oriented
EDUCATION:
ANALYZE
Bachelor’s degree or higher in law, accounting, banking, or management;
certification as a Certified Financial Planner or Chartered Financial Consultant
What are some financial goals that a financial advisor could help you reach?
To learn more about career paths for financial advisors, visit finance07.glencoe.com.
finance07.glencoe.com
Chapter 3
Money Management Strategy
69
Cash Flow Statement: Income
Versus Expenses
As You
Read
QUESTION
What kind of information do you get from creating
a cash flow statement?
What is the difference
between net worth and
cash flow?
The money that actually goes into and out of your wallet and
bank accounts is called cash flow. It is divided into two parts: cash
inflow and cash outflow. Cash inflow is the money you receive, or
your income. That may include a paycheck from a job, an allowance
from your parents, or interest earned in your savings account. Cash
outflow includes all of the money you spend.
A cash flow statement is simply a summary of your cash flow during a particular period, usually a month or a year. This summary gives
you important information and feedback on your income and spending patterns. To create a cash flow statement, such as the one shown in
Figure 3.3, follow these steps:
1. Record your income.
2. Record your expenses.
3. Determine your net cash flow.
Cash Flow Statement
Figure 3.3
Amy Grossman
Cash Flow Statement for Month Ending July 31, 20--
Income (Cash Inflow)
Take-home pay
$450
Allowance
100
Savings account interest
Total income
12
$562
Expenses (Cash Outflow)
Fixed expenses
(cable TV, train commuter tickets, etc.)
$ 80
Variable expenses
(recreation, clothing, take-out food)
320
Total expenses
$162
Net Cash Flow
Money Supply
$400
Amy’s cash flow statement indicates that her net cash flow is $162.
How might she increase her net cash flow?
70
Unit 1
Planning Personal Finances
STEP 1: Record Your Income
List all of your sources of income during a given month, and
record the amounts as your cash inflow. Make sure that you record the
exact amount. Most paychecks include various deductions for federal
and state taxes. These taxes are withheld from the total amount of
money you have earned, or your gross pay. Your take-home pay, or
net pay, is the amount of income left after taxes and other deductions
are taken out of your gross pay. For example, Joshua earns $1,000 a
month, but he does not receive the entire amount. After taxes, his
take-home pay is $700. Your take-home pay plus your interest earnings on investments and savings is your cash inflow.
Some financial experts evaluate the strength of a person’s income
by measuring discretionary income—the money left over after
paying for the essentials, such as food, clothing, shelter, transportation, and medication. You can spend this amount at your discretion,
or according to your wants. The higher your discretionary income,
the better off you are.
One Life to Plan
Learn about different
kinds of investments that
a financial planner would
suggest for a young person planning for college
and then beginning a
career.
To continue with
Task 4 of your
WebQuest project, visit
finance07.glencoe.com.
STEP 2: Record Your Expenses
Expenses can be fixed or variable. Fixed expenses are those that
are more or less the same each month. Cable television charges, rent,
and bus fare for commuting to work or school are all examples of
fixed expenses. Variable expenses may change from month to month.
Food and clothing are variable expenses. During some months you
may need to buy new sweaters and pants, but during other months,
you may not buy any clothing. Electricity, medical costs, and recreation are also examples of variable expenses. The total of your fixed
and variable expenses is your cash outflow.
GO FIGURE
FINANCIAL MATH
NET CASH FLOW
Jason has a positive net cash flow of $150.
Synopsis: Computing your net cash flow will help
you determine your financial health.
YOU FIGURE
Example: What is Jason’s net cash flow if his
income for the month is $1,500 and his expenses
add up to $1,350?
Formula: Income ⫺ Expenses ⫽ Net Cash Flow
Solution: $1,500 ⫺ $1,350 ⫽ $150.
finance07.glencoe.com
You work 12 hours a week, 3 weeks a month,
at a part-time job after school. You get $8 an
hour. You pay $40 a month for gas, $60 a
month for entertainment (CDs, movies, etc.),
and $25 a month toward paying off your new
skis. What is your net cash flow?
Chapter 3
Money Management Strategy
71
STEP 3: Determine Your Net Cash Flow
You can determine your net cash flow by subtracting your
expenses from your income.
Because Jason’s net cash flow is positive, he has a surplus—extra
money that can be spent or saved, depending on a person’s financial
goals and values. A cash surplus can be placed in an emergency fund
savings account for unexpected expenses or to pay living costs if you
do not receive a salary. You might also place cash surplus in savings
and investment plans.
If Jason’s net cash flow were negative, however, he would have
a deficit. A deficit is the financial situation that occurs when more
money is spent than is earned or received.
A current and accurate cash flow statement can provide the
foundation for preparing and implementing your spending, savings,
and investment plans.
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SAVINGENOUGH
72
Unit 1
Planning Personal Finances
Your Financial Position
How do you calculate your net worth by using
personal financial statements?
When your net cash flow changes, so does your net worth. Every
time you create a deficit by spending more than you earn, your net
worth decreases. To make up for the deficit, you can either borrow
money (increasing your liabilities) or draw from your savings (decreasing your assets). In either case, your net worth declines.
On the other hand, if you end a month with a surplus, your
net worth will probably go up. You can choose to save the money,
adding to your assets, or you can use it to pay off previous debts and
reduce your liabilities. Whichever path you select, your net worth
will increase. As a general rule, if you have a surplus cash flow, your
net worth increases; if you have a deficit, your net worth decreases.
However, net worth does not give you a completely accurate picture of your finances. You can use your balance sheet and cash flow
statement to determine your financial situation in other ways as well.
See Figure 3.4 for details.
Section 3.2 Assessment
QUICK CHECK
1. How do you calculate your net worth when
preparing a balance sheet?
2. How should you record your income on a
cash flow statement?
3. If your personal financial statements indicate that you have a deficit, what might you
do to change your financial situation?
THINK CRITICALLY
4. List the three most valuable items that you
own that would fall into the category of
personal possessions.
USE MATH SKILLS
5. Finding the Net Tameka’s income for
the month of January was $2,375. Her fixed
expenses during that same month were
$750, and her variable expenses totaled
$1,750.
Calculate What was Tameka’s
net cash flow during the month of
January? Be sure to indicate whether she
had a surplus or a deficit.
SOLVE MONEY PROBLEMS
6. Spending Wisely Larry’s personal balance sheet shows $1,200 in credit card
debts; a savings account of $550; and personal property amounting to $3,700 in rare
stamps. Recently he was promoted at his
part-time job. Because of that and because
he made an effort to reduce his expenses,
he had a positive cash flow of $600 last
month. He asks what you think he should
do with the surplus cash.
Present Evaluate Larry’s possible
choices and come up with a specific
plan of action for his use of the surplus.
Chapter 3
Money Management Strategy
73
Section 3.3
Focus on
Reading
Budgeting for
Financial Goals
Read to Learn
Preparing a Practical Budget
• How to identify the steps
of creating a personal
budget.
• How to discuss the
advantage of increasing
your savings.
Main Idea
Learn to budget and
achieve financial goals by
increasing your savings.
Key Terms
• budget
• consumer price index
(CPI)
• budget variance
Before
You Read
PREDICT
What is your definition of a
budget, and what are the
advantages of using one?
What is so important about having a budget?
A budget is a plan for using money to meet wants and needs.
Having a budget is necessary for successful financial planning. By
using a budget, you will learn how to live within your income and
how to spend your money wisely. You will also develop good money
management skills that will help you reach your financial goals.
STEP 1: Set Your Financial Goals
As discussed in Chapter 1, your financial goals are the things
you want to accomplish with your money. What you do with your
money today will affect your ability to achieve your financial goals in
the future. To meet those financial goals, you will need to plan your
savings, your spending, and your investments.
How should you set your financial goals? That depends on
your lifestyle, your values, and your hopes for the future. The type
of job you choose will determine your income and your ability to
save to reach your financial goals. For example, perhaps you would
like to get a pilot’s license after you graduate from college. When
setting your financial goals, you will need to take into account the
cost of the lessons and the amount of time it will take to obtain the
license.
It is important to make your financial goals as specific as possible. Having a definite time frame can also help you achieve your
goals. You can separate your goals into short-term, intermediate, and
long-term goals.
STEP 2: Estimate Your Income
When you have set your goals, you can begin working on a budget that is practical for you. Start by recording your estimated income
for the next month. Include all sources of income that you know you
will be receiving, such as your take-home pay and income on investments and savings. Do not include money you may or may not get,
such as bonuses and gifts.
74
Unit 1
Planning Personal Finances
Estimating income is easier in some cases than in others. For
example, because Ryan always works 12 hours each week, he gets
paid the same amount every month. In contrast, Rachel works irregular hours at two part-time jobs. During some weeks, she earns only
$75, but there are weeks when her earnings are more. Rachel should
estimate her income based on her best guess about what will happen in the coming month. She might make her estimate a little
lower than she thinks it will actually be. That will help her avoid
overspending.
In another example, in Figure 3.5 on page 76, the Thompsons
have estimated that their income for next month will be $3,550.
Estimate your income and record that amount, using a similar
budget form. Remember that a budget should always be a written
document.
STEP 3: Budget for Unexpected Expenses
The Thompsons have decided to put aside a little money each
month for unexpected expenses and savings to reach their financial
goals. Every month they place $100 in an emergency fund. One of
their financial goals is to save three to six months’ worth of living
expenses in case someone in the family becomes unemployed, needs
medical attention, or encounters some other financial problem. They
keep their emergency fund in a separate savings account that will
earn interest.
The Thompsons are also trying to meet three other financial
goals, some short-term, others long-term. They deposit money in
their vacation fund each month, hoping that they will soon have
enough to take a trip to Jamaica. They also have a college fund for
their young children and an investment fund to buy stocks. They put
$150 into these other special savings accounts each month, bringing
their total monthly savings to $250.
HISTORY
By 1865, approximately
one-third of all circulating
currency was counterfeit.
As a result, the Department of the Treasury
established the United
States Secret Service in an
effort to control counterfeiting. Just as it is important that the government
manages the distribution
of currency and tracks
down counterfeiters, it is
important that you properly manage your money.
Why is setting financial
goals such an essential
part of good money
management?
STEP 4: Budget for Fixed Expenses
The Thompsons then list all their monthly expenses. They start
by listing their fixed expenses, or those that do not change from
month to month. That includes their mortgage, automobile and student loan payments, and insurance premiums. Their budgeted total
for fixed payments totals $1,200.
STEP 5: Budget for Variable Expenses
Planning for variable expenses—those that vary from month to
month—is not as easy as budgeting for fixed expenses. Such items as
medical costs are often unexpected. Heating and cooling costs can
vary with the season. You should make your best guesses based on
costs from previous months. When in doubt, guess high. The Thompsons budgeted $2,100 for these variable expenses.
Chapter 3
As You
Read
RELATE
Do you think you should
have an emergency fund?
How large do you think
your fund should be?
Money Management Strategy
75
4HE-ONTHLY"UDGET
&IGURE
Step 1:
Set Financial
Goals
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Step 3:
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Step 4:
Budget for
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Step 5:
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______
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______
Step 7:
Review Spending and Saving Patterns
+EEPING4RACK
9OUCANUSETHISSAMPLEMONTHLYBUDGETFORMTOKEEPTRACKOFYOUROWN
INCOMEANDEXPENSESSOYOUCANMANAGEYOURFINANCESANDREACHGOALS
)NTHISSAMPLEHOWMIGHTTHE4HOMPSONSBUDGETBEAFFECTEDIF
THEYHADTOBUYASECONDAUTOMOBILE
76
Unit 1
Planning Personal Finances
How can you determine reasonable expense levels? Financial
experts publish guidelines that tell what percentage of income should
go for various expenses. The U.S. Department of Labor produces the
consumer price index (CPI), which is a measure of the changes
in prices for commonly purchased goods and services in the United
States. Comparing the CPI to your actual budget can indicate when
you are spending too much on various items. A third source of information is your friends and relatives. If you eat out more often than
your friends do or buy more clothes than your siblings buy, your budget may be in trouble.
STEP 6: Record What You Spend
Your budget is prepared, but your work is still incomplete.
You must begin to keep track of your actual income and expenses.
Remember, many budgeted items are only guesses. Your old car
may continue to run through the month. However, maybe it will
break down next week and need $400 worth of repairs. To find out
how practical your budget is, you will need to keep track of your
expenses during an entire month and then revise your budget if
necessary.
In Figure 3.5, the Thompsons have used a second column to
record the actual amounts they spent. Some of their expenses were
what they had expected, and some were not. Your spending will not
always work out as planned. The budget variance is the difference between the budgeted amount and the actual amount that you
spend. This figure can be either a surplus or a deficit. It is a surplus if
you spend less money than you had expected, and it is a deficit if you
spend more. Budget variances can also occur in the income category.
Earning more than you anticipated creates a surplus, whereas earning
less results in a deficit.
Although the Thompsons have no budget variance on the
income side, they have a surplus in their expense section. They spent
$50 less than they had expected they would spend on entertainment.
However, they spent more than they had budgeted in the other variable expense categories, creating a deficit in those categories. The
overall result was a total monthly deficit of $75.
STEP 7: Review Spending and
Saving Patterns
Budgeting is a continual process. You may need to review your
budget each month and consider making changes based on the nature
of your expenses.
Reviewing Financial Progress If you fall behind on bill payments,
or if you are left with a lot of money at the end of the month, you may
need to revise your budget. Even if your budget generally seems to be
on target, it is a good idea to prepare an occasional budget summary
to review your progress. (See Figure 3.6 on page 78.)
Chapter 3
Have Fun for Less
1. Rent movie videos
or DVDs or go to
a matinee with
friends.
2. Call a museum;
many offer free
admission one day
a month.
3. Check with your
local parks for free
music concerts.
4. Volunteer as an
usher at a theater
to see plays and
concerts for free.
5. Look in your newspaper’s calendar
section for free
events.
As You
Read
QUESTION
Prepare a written monthly
budget according to Steps
1 to 7. How well does your
budget match your financial goals?
Money Management Strategy
77
Figure 3.6
A Budget Summary
You can prepare an annual budget
summary to compare your actual
spending with the amounts that
you have budgeted. Completing
an annual budget summary will be
vital to both successful short-term
money management and longterm financial security.
1
Create your own
monthly budget
document.
2
Record what you spend in each
category of your budget during a
period of several months.
3
Highlight areas where your
spending consistently goes
over your budget. Also highlight areas where you have
spent less than you budgeted.
This will help you identify the
changes you need to make in
your budget.
78
Unit 1
Planning Personal Finances
Revising Goals and Adjusting Your Budget If you always
have deficits, ask yourself where you can cut your expenses. Review
your spending patterns carefully to see where the shortfalls occur.
Could you rent videos instead of going to the movie theater every week?
Could you take a bag lunch to school instead of buying cafeteria food?
Perhaps you do not really need a car to get around. Doing without it might
sometimes be inconvenient, but it certainly would be cheaper.
To decide which expenses to cut, you might take another look
at your financial goals. Which purchases fit into your overall plan for
the future? The answer can help you in deciding what to cut. How
quickly are you progressing toward your objectives? Are your goals
changing or outdated? It may be necessary to revise your goals to
meet your needs.
How to Budget Successfully
How can you plan a good budget?
Simply preparing a budget will not solve your financial problems, nor will keeping track of every expense down to the last penny.
You have to follow a practical spending plan to make it work.
Money management experts agree that a budget should have
several important characteristics:
1. A good budget is carefully planned. Your estimates
cannot be wild guesses, and your spending categories must
cover all expenses.
2. A good budget is practical. If your first full-time job
pays you $1,500 a month, do not expect to buy an expensive
sports car soon.
3. A good budget is flexible. As you experience changes in
your life—marriage, children, or retirement—you will need
to adapt your budget accordingly. You will also encounter
unexpected expenses and unexpected shifts in income. Your
budget should be easy to revise when life changes such as
these occur.
4. A good budget must be written and easily accessible.
Use a notebook, folder, or computer to store your budget. Do
not try to keep the information in your head or on loose scraps
of paper. The odds are you will forget or lose the information.
Ways to Increase Your Savings
Why is it important to have a savings plan?
Increasing your savings is the key to establishing a sound financial future. The more you save, the better you will be able to handle
unexpected emergencies and the sooner you will be able to meet your
financial goals. If you save large amounts, it may be possible for you
to retire comfortably and to send your children to college. Best of all,
money that is saved earns interest income.
Chapter 3
Put on
Your
Financial
Planner’s
Cap
Your client has just started
his first full-time job and
needs to revise his budget to
reflect the new income. What
expense categories will you
suggest to change?
Money Management Strategy
79
However, learning to save is not easy. Many people are tempted
to buy whatever they want, whenever they want it. Moreover, when
income is low, saving anything at all can be especially hard. From
1996 to 2001, Americans saved an average of only 31 cents for every
ten dollars they earned. Fortunately, you can improve your savings
rate by using several savings strategies.
Global Financial Landscape
Standard and Poor’s publishes the globally recognized
S&P 500® financial index. It also gathers financial statistics, information, and news, and analyzes this data for
international businesses, governments, and individuals
to help them guide their financial decisions.
3EOUL
SOUTH KOREA
In the last half-century, South Korea has grown
into one of the world’s leading high-tech economies.
This success is due in large part to the Korean peoples’ willingness to spend great amounts of time and
money on education. Fierce competition to attend
the country’s best colleges and universities has developed. As a result, there is an extremely high demand
for private tutoring, “cram schools,” pre-testing services for college entrance exams, and educational
sites on the Internet. Children as young as two can
receive 20 minutes of weekly instruction in Korean,
English, and math. This type of extra schooling does
not come cheap. In a single year, Koreans pay more
than $25 billion for after-school instruction. Parents
may spend as much as $36,000 on each child per
year, as Koreans compete for a position in the global
landscape.
DATABYTES
Capital
Seoul
Population
47,939,000
Languages
Korean, English
Currency
South Korean won
Gross Domestic
Product (GDP) $855.3 billion (2003 est.)
GDP per capita $17,700
Industry: Electronics, automobile production,
chemicals, shipbuilding, steel, and textiles
Agriculture: Rice, root crops, barley, vegetables, cattle,
and fish
Exports: Electronic products, machinery and
equipment, motor vehicles, steel, ships, and textiles
Natural Resources: Coal, tungsten, graphite, and
molybdenum
Think Globally
Why do you think education has been such an
important part in South Korea’s growth into a hightech economic leader?
80
Unit 1
Planning Personal Finances
Learn to identify and understand the standard
financial documents you will use in the real world.
Investigate: A Personal Balance Sheet
A personal balance sheet contains the
following information:
• Your assets with a value for each
• Your liabilities with a value for each
• Amount of your net worth
Your Motive: A balance sheet shows
your financial health at a given point in
time. Updating your personal balance
sheet from time to time will help you
keep track of your financial situation.
Tanisha Brigg’s Personal Balance Sheet
Amount
Assets
$3,000
15,000
125,000
Cash/Checking & Savings
Securities (stocks, bonds, etc.)
Real estate/home
Other real estate
Automobiles
Personal property
Personal loans
Insurance cash values
0
18,000
23,000
5,000
15,000
$204,000
Total Assets
Liabilities
Loans
Credit card debt
Current monthly bills
Mortgage
Unpaid taxes
$ 3,500
6,500
2,500
145,000
4,500
2,300
Other debt
Total Liabilities
$164,300
NET WORTH
$39,700
Key Points: A balance sheet lists the items
of value that you own, the debts that you
owe, and your net worth. Personal financial
statements such as a personal balance sheet
can help you determine what you own and
what you owe; measure your progress toward
your financial goals; track your financial
activities; and organize information for
taxes and credit applications.
Find the Solutions
1. What are Tanisha’s assets?
2. What are Tanisha’s liabilities?
3. According to the balance sheet, what is
Tanisha’s current net worth?
4. Why might a bank be interested in a
person’s net worth?
5. How do you figure net worth?
Chapter 3
Money Management Strategy
81
SAVE Bringing your lunch
to school or work is one way
to spend less money than
you would by eating out.
On an average day, how much
money do you spend on food?
How might you save in this area?
Pay Yourself First
Common
CENTS
Pay or Save?
Be a smart consumer and
pay off your credit card
bills before you put money
away in a savings account.
The interest rate charged
on credit cards is usually
higher than the interest
you can earn from your
savings account. How do
you determine the interest
rate on your credit card?
82
Unit 1
One method you can adopt is to set aside a fixed amount as
savings before you sit down to pay your bills. For example, Tyronne
considers his savings as a fixed expense. He writes himself a check for
$75 before he pays his bills; then he sends the check for immediate
deposit into his savings account. As an alternative to writing a check
each month, many banks will automatically deduct a certain amount
from your checking account each month and deposit that in your
savings account. Tyronne has set a specific dollar amount, but you
can also set aside a percentage of your monthly income.
Payroll Savings
Your employer may offer a similar option called a payroll savings
deduction. A payroll savings deduction is a portion of your earnings
that is automatically taken out of your paycheck and put into your
savings or retirement account.
Planning Personal Finances
For example, Teresa has authorized her employer to deduct $50
from each paycheck. Although that arrangement reduces her takehome pay to $750, she knows she is on her way to meeting her financial goals.
Spending Less to Save
A third way to save is to start small. Make an effort to spend less
each day. If you read a magazine in the library rather than buying it
in a store, count out the purchase price of the magazine and place
it in a jar. If you go to the $4.50 matinee movie instead of the $7.75
evening show, pat yourself on the back and pay the jar the $3.25
difference. Before long you will have enough cash to start a savings
account or make a substantial deposit into an existing one.
How you save, though, is less important than the action of saving. The earlier you start, the better. Even small amounts of savings
can grow quickly and help you reach your financial goals.
After You
Read
REACT
With the information
provided in this chapter,
would you be able to create a budget and stick to
it? Why or why not?
Section 3.3 Assessment
QUICK CHECK
1. What are some practical ways to budget for
variable expenses?
2. If you continually experience budget deficits, how can you decide which expenses
to cut?
3. What are three methods you might use to
increase your savings?
THINK CRITICALLY
4. List three of your variable expenses.
Estimate the amounts for each of
these expenses for one month.
USE COMMUNICATION SKILLS
5. No Cuts! Tara complains that she cannot seem to get ahead financially. Every
time she receives a paycheck, it seems to
disappear. She also points out that all her
expenses, such as her phone bill, car payment, and subscriptions to several magazines, are absolutely necessary.
Write About It Write a paragraph
persuading Tara that cutting some of
her expenses is not only possible but is also
necessary if she wants to meet her financial
goals.
SOLVE MONEY PROBLEMS
6. Budgets Hiroko earns $2,000 a month.
Her monthly expenses are about $1,850,
leaving $150 for savings. She now has
$1,000 in her emergency savings account
and another $300 in an account for a new
computer. Hiroko has been offered a job
that will pay her an extra $200 a month,
but she will need to buy a car to travel to
the new job.
Analyze What financial factors
should Hiroko consider as she decides
whether to accept the job?
Chapter 3
Money Management Strategy
83
Chapter 3 Review & Activities
CHAPTER SUMMARY
• There are opportunity costs, or tradeoffs, in all decisions. When you make
a decision about how to manage your
money, you remove the option to use
the money in a different way.
• Organizing your financial documents
makes it easier to plan and measure
progress, handle routine money
matters, know how much money is
available, and make effective decisions.
• You can organize financial documents
in home files, a safe-deposit box, and
on a computer.
• A personal balance sheet helps determine your net worth, so you can manage your money to meet your financial
goals. A personal cash flow statement
helps determine the amount of cash you
receive and how you spend it.
• On a personal balance sheet, list the
value of all your assets, along with all
your liabilities. On a personal cash flow
statement, record your income and
expenses. Then subtract your expenses
from your income to determine your
net cash flow.
• To create a budget: (1) Set financial
goals; (2) estimate your income; 3)
budget for unexpected expenses and
savings; 4) budget for fixed expenses;
(5) budget for variable expenses; (6)
record what you spend; and (7) review
your spending and saving patterns.
• Savings are the key to a sound financial
future. Savings enable you to handle
unexpected emergencies.
Communicating Key Terms
Your best friend has asked you to explain how much he needs to save from each paycheck to
buy a digital camera that costs $350. Use 8 to 12 of the terms below to write an explanation.
• money management
• safe-deposit box
• personal financial
statement
• personal balance sheet
• net worth
• assets
• wealth
•
•
•
•
•
•
•
•
liquid assets
real estate
market value
liabilities
insolvency
cash flow
income
take-home pay
•
•
•
•
•
•
discretionary income
surplus
deficit
budget
consumer price index (CPI)
budget variance
Reviewing Key Concepts
1.
2.
3.
4.
5.
6.
7.
84
List at least three examples from your own experience of opportunity costs.
Explain the benefits of keeping and organizing financial records and documents.
Identify documents to store in home files, safe-deposit boxes, or on a computer.
Describe what you learn from a balance sheet and personal cash flow statement.
List the steps in preparing a personal balance sheet and a personal cash flow statement.
Identify the steps in preparing a personal budget.
Explain how you can use your budget to identify ways to increase your savings.
Unit 1
Planning Personal Finances
Chapter 3 Review & Activities
Social Studies Many people have difficulty saving money for a variety
of reasons. Research some typical roadblocks to saving money.
Write About It Write a paragraph explaining at least three reasons and
how you would counsel them if they asked you for help.
Saving for a Club Trip
The school Spanish Club is sponsoring a trip
to Mexico that will cost $1,000 per student. Your parents will contribute
$300, but you need to save the remaining $700 over the next four months.
You currently work seven hours a week babysitting for $10 per hour. The
following are your monthly expenses:
Variable Expenses (clothes, CDs, movie tickets, etc.) $180
Fixed Expenses (school fees, bus pass)
$65
1. Calculate your total monthly earnings and expenses.
2. Compute by using spreadsheet software to calculate how much you need
to earn and/or reduce your expenses to meet your goal.
Connect with Mathematics You want to save $2,000 for college
by working over the summer. You can find a job that will pay you for 40
hours per week at regular rates plus an average of 10 hours per week at
overtime rates at 1.5 times. You can work for 10 weeks. You figure that you
need $150 per week to pay miscellaneous variable expenses.
1. Calculate How much will you need to earn per hour to save at least
$2,000 in addition to meeting your weekly expenses?
2. Think Critically Is $150 in weekly expenses a realistic estimate? What
are you not including?
How Much Is Enough? You have started a job at an annual salary of
$32,000. Your take-home pay is about 2/3 of your gross salary.
Log On Use an Internet search engine to find Web sites that discuss
what proportion of your salary you should spend on fixed expenses.
Answer the following questions:
1. What percentage of your take-home pay should be fixed expenses?
2. What percentage of your take-home pay should be discretionary income?
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Newsclip: Ways to Save Best-selling personal finance authors
advise finding ways to save by cutting small luxuries and saving money from
summer jobs.
Log On Go to finance07.glencoe.com and open Chapter 3. Read
the article. Then make a record of expenses. Ask yourself: What are
your spending and saving habits?
finance07.glencoe.com
Chapter 3
Money Management Strategy
85
Chapter 3 Review & Activities
MONEY MANAGEMENT QUIZ
Imagine you were living on your own. How would you handle
your money? On a separate sheet of paper, take this money
management quiz.
1. I would create a budget for my income and expenses.
a. Always
b. Sometimes
c. Never
2. I would pay the rent or mortgage payment and utility bills on time.
a. Always
b. Sometimes
c. Never
3. I would keep three months of my living expenses in reserve for emergencies.
a. Always
b. Sometimes
c. Never
4. I would save 10 percent of my take-home pay.
a. Always
b. Sometimes
c. Never
5. I would set money aside for large expenses.
a. Always
b. Sometimes
c. Never
6. I would save to buy what I want.
a. Always
b. Sometimes
c. Never
7. I would use credit only when I have money to cover the charge.
a. Always
b. Sometimes
c. Never
8. I would balance my checkbook every month.
a. Always
b. Sometimes
c. Never
How did you score? Give yourself 2 points for each “Always,” 1 point for each “Sometimes,”
and 0 points for each “Never.”
If you scored 12–16, you are practicing good money management skills.
If you scored 6–11, with a little more effort you could improve your money management skills.
If you scored 0–5, it is time to start developing money management skills.
86
Unit 1
Planning Personal Finances
Chapter 3 Review & Activities
Your Financial Portfolio
What Is Your Net Worth?
Roberto plans to go to Europe next summer with the school band. He probably will
be able to save enough money by working all year at his part-time job. However, he is
prepared to sell some of his possessions if he needs to, so he made a list of his assets
and liabilities to determine his net worth.
Roberto’s Balance Sheet as of December 31, 20-Liquid Assets
Checking account balance
$150
Savings accounts
635
Total liquid assets
$785
Personal Possessions
Market value of automobile
$2,300
Stereo, TV, and video equipment
1,600
Computer
1,350
Watch
Total personal possessions
330
$5,580
Investment Assets
Savings bonds
$
Total investment assets
Total Assets
600
600
$6,965
Liabilities
Balance due on car loan
$1,527
Total Liabilities
$1,527
Net Worth
$5,438
Calculate
Determine your net worth. In your workbook or on a separate sheet of paper,
list your assets, personal possessions, and liabilities (what you owe). Are you surprised
that your net worth is as much (or as little) as it is? How much would you like your net
worth to be in ten years? When you retire?
Chapter 3
Money Management Strategy
87